US Inflation Accelerates to 3.8%, Fed Accused of Inaction Amid Rising Spending
Annual US inflation reached 3.8% in April, while the core producer price index rose 6%; economists criticized former Fed Chair Powell for ignoring excessive aggregate demand as the root cause of inflation, rather than just the oil price shock.
Here is an analysis written from an insider's perspective, seeing how macroeconomic numbers turn into a political crisis and understanding that current inflation is not just statistics but a verdict on an entire economic model.
[The Gist]: What's Really Happening
The inflation data released on May 18 — 3.8% annual rate and a 6% jump in the core producer price index — is not just a miss on forecasts. It is the moment of reckoning for a systemic error the Federal Reserve made back in June 2024, when then-Chair Jerome Powell began a rate-cutting cycle under election-year pressure. At that time, the rate was lowered from 5.5% to 4.75% over three meetings, justified as "approaching a soft landing." Reality turned out differently: aggregate demand, fueled by $1.8 trillion in fiscal injections from the Biden administration for infrastructure projects and green energy, never disappeared. Instead, it went latent, ready to explode at the first external shock. That shock was the Iran crisis and the blockade of the Strait of Hormuz, which sent energy prices soaring. But oil is just a trigger, not the root cause. The root cause is that the M2 money supply, which contracted in 2023, began growing again in February 2025 and has now reached $21.3 trillion — $800 billion higher than a year ago. The Fed tried to sterilize this liquidity through reverse repos, but that mechanism is exhausted: the volume of operations has fallen from a peak of $2.5 trillion to $340 billion today. This means excess cash has flooded commodity markets and the services sector, spinning an inflationary spiral that can no longer be stopped by raising rates.
Timeline and Context
Criticism of Powell, which has spilled onto the pages of the business press, has been brewing for a long time. As early as March 10, 2026, at a closed seminar at the Federal Reserve Bank of Dallas, economist David Blanchflower presented a report arguing that the demand factor contributed 58% to current inflation, while the supply shock contributed only 28%. The remaining 14% came from devaluation expectations. Powell, who had already left office and handed the reins to Christopher Waller, publicly dismissed these calculations. However, April's figures confirmed the critics were right. On May 15, the Bureau of Labor Statistics recorded a 4.9% year-over-year increase in non-energy services prices — the highest since September 2023. Housing prices, as measured by the Shelter index, rose 5.2%. Rents for one-bedroom apartments in Phoenix increased 14% year-over-year. On May 17, the producer price index showed a 6% rise — the sharpest jump since 2022, with 40% of that increase coming not from energy but from intermediate goods: packaging, logistics, chemicals. On May 19, the Fed found itself in a trap: it needs to raise rates, but doing so would kill the banking sector, which holds $680 billion in commercial real estate on its balance sheets, assets that have lost 30% of their value from the peak.
Who Wins and Who Loses
Winners:
- Holders of physical assets. Gold reached $2,840 per troy ounce on May 19, up 11% year-to-date. Silver rose to $38 per ounce. Investors who bought gold ETFs in January have seen an 18% return in five months.
- Large corporate borrowers with fixed rates. Apple, which issued $10 billion in 10-year bonds at 4.9% in January 2026, now looks like a corporate finance genius: the same paper would cost the company 6.2% today, saving $130 million in annual interest payments.
- US shale oil exporters. WTI at $107 per barrel with a production cost of $38 in the Permian Basin means an operating margin of 181%. This is the best in the sector's history.
Losers:
- Pension funds invested in long-term Treasuries. The California State Teachers' Retirement System (CalSTRS), with a $320 billion portfolio, lost $18 billion on bond revaluation as the 10-year Treasury yield surged to 4.95%.
- Small businesses. The interest rate on SBA loans for small enterprises has reached 11.3%. About 35,000 restaurants and retail stores are on the verge of closing within the next 60 days.
- Adjustable-rate mortgage borrowers. The rate on a 30-year adjustable-rate mortgage has hit 8.2%, increasing the monthly payment on a $400,000 loan by $740 compared to March 2025.
What the Media Isn't Saying
The first and most dangerous non-obvious insight: the acceleration of inflation to 3.8% has triggered a hidden crisis in the Treasury Inflation-Protected Securities (TIPS) market. Their nominal volume is $2.1 trillion, and for each percentage point of inflation above the forecast, the US Treasury must pay holders approximately $21 billion per year. The US budget deficit is already $2.4 trillion, and the unplanned debt service burden could reach $48 billion by year-end, equivalent to the Pentagon's budget for two months. The Treasury has already begun secret consultations with primary dealers about the possibility of suspending indexation — a step technically equivalent to a partial default.
The second underreported fact: the 6% rise in producer prices is not least due to the mass deportation of migrant workers, which the Trump administration accelerated starting January 2026, rather than the Iran crisis. According to the Department of Agriculture, the labor shortage in California has reached 110,000 people. Strawberry and lettuce crops are rotting in the fields, and fresh vegetable prices have risen 19% in a month. This is structural supply-side inflation that monetary policy cannot fix — but Congress blocks any attempts to ease immigration policy.
Third: the Fed is accused of inaction, but in fact it is acting — only through covert methods. Through the Standing Repo Facility, Waller is injecting up to $100 billion per week into select banks, effectively subsidizing the largest financial institutions under the guise of liquidity support. JPMorgan Chase received $28 billion at a 5.1% rate, while small businesses borrow at 11.3%. This is a hidden form of quantitative easing that exacerbates inequality and fuels asset inflation.
Forecast: Next 30 Days and 90 Days
30 days (until June 18, 2026):
The Fed will face an impossible choice. At the June 10-11 meeting, Waller will be forced to raise rates by 50 basis points to 5.75%, despite protests from the Treasury and the White House. This will trigger a stock market crash: the S&P 500 will lose at least 8%, the Nasdaq 12%. Tech giants will be hit especially hard: Apple will lose $280 billion in market cap, Microsoft $190 billion. The VIX volatility index will spike to 45 points. The Trump administration will urgently announce a freeze on TIPS indexation, causing panic in the debt market. The 10-year Treasury yield will exceed 5.5%. Inflation expectations, as measured by the 5-year forward swap, will reach 3.2%.
90 days (until August 17, 2026):
By mid-August, the US economy will enter a stagflationary spiral. Q3 GDP growth will slow to 0.3%, while inflation remains at 3.5-3.7%. The Fed will be paralyzed: further rate hikes risk a banking crisis, while cuts risk hyperinflation. Gold will reach $3,100 per ounce, Bitcoin $115,000, as investors flee dollar-denominated assets. The dollar will weaken to parity with the euro (1.00) and fall below 100 yen. The key risk: mass defaults on junk-rated corporate bonds, whose volume has reached $1.8 trillion. At least 15 major retailers and 7 regional banks will be on the brink of bankruptcy. The Treasury, under Scott Bessent, will be forced to ask Congress for an emergency $3 trillion increase in the debt ceiling, triggering a severe political crisis ahead of the midterm elections. America will enter an era where inflation has turned from a temporary inconvenience into a chronic disease, and the tools to treat it are exhausted.
— Editorial Team
